With many of us feeling squeezed by the cost of living crisis, unfortunately the government will deliver us more pain come April, lest Chancellor Rishi Sunak changes the state of play in the Spring Statement. Read on for 8 ways you’ll pay more tax.
Summary of tax rises to expect:
- National Insurance is rising.
- Frozen income tax thresholds mean you’ll pay more income tax.
- Dividend tax is rising.
- Inflation means paying more VAT.
- Council tax is rising.
- Rising house prices mean you’ll pay more stamp duty
- Higher house prices and a frozen CGT threshold mean more tax for property investors.
- More estates will pay inheritance tax after allowances were frozen.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, explains the issue we face come April:
“This April, just as we’re reeling from horrendous price rises, the taxman will wade in to deliver another terrible blow. It’s not just the horrible National Insurance hike and the miserable dividend tax rise, there are actually eight ways we’ll pay more tax, so it’s worth taking steps to ensure we don’t end up paying more than our fair share.”
“The amount of tax we pay almost doubled between 2001/2 and 2019/20. It fell back during the pandemic, but January figures show it bouncing back with a vengeance. Unfortunately, this is just the beginning: the new tax year will see taxes soar, as we inch towards the highest tax burden since the 1950s.”
1. National Insurance is rising
National Insurance will rise by 1.25 percentage points, and affect everyone under state pension age earning more than £9,880 from wages. The size of this tax hike doesn’t sound dramatic, but that doesn’t translate into a 1.25% rise in what you pay. Someone earning £30,000 currently pays £2,452 a year in NI, and the rise would increase it by £256. That’s effectively a rise of over 10% in their NI bill.
Everyone who pays NI will take a hit, but for those whose finances are on a knife edge, this could be a devastating blow. The National Institute of Economic and Social Research has calculated that could push 30% more people into destitution – so they can’t afford the basic essentials in life.
2. Income tax thresholds frozen
The personal allowance – how much you can earn before paying tax – has been frozen at £12,570, and the higher rate threshold – the point at which you start paying 40%, has stuck at £50,270. The additional rate threshold hasn’t moved from £150,000 since it was introduced in 2010.
When the freezing of the tax thresholds was announced, the OBR calculated that by 2025/26 we’ll be paying £8.2 billion more a year in income tax as a result. However, the higher inflation is, the higher this bill is likely to be.
As prices rise, employers will be under pressure to raise salaries, so their staff can afford to live. Salaries rising will automatically increase the amount of tax we pay, but the frozen thresholds also mean that the more wages rise, the more people will cross the frozen thresholds to pay a higher rate of tax. Calculations in January showed that 1.5 million will start paying income tax, while 1.2 million will move into a higher tax bracket.
3. Dividend tax is rising
If you make more than £2,000 in dividends outside an ISA, or you own your own business and pay yourself in dividends, you’ll face tax, and the Chancellor will hike the rate by 1.25 percentage points from April. This is set to cost us £815 million a year by 2025/26, which is why Hargreaves Lansdown’s research showed almost two in five investors are worried about the impact it could have.
4. Inflation means paying more VAT
Higher prices will automatically feed through into us paying more in VAT. With prices climbing on everything from furniture to fashion, we’ll see the tax on everything rise too.
You can see the impact of rapidly rising prices by looking at what has happened to petrol. VAT is charged at 20% on petrol, which has typically been around 20p per litre over the past three years. At the moment it’s around 26p per litre. It means the extra VAT alone has added £3.30 to the cost of filling up a 55 litre tank.
5. Council tax is rising
Councils will be able to raise rates by up to 3% from April. This could mean the average tax on a house in Band D rises £56.94, from £1,898 to almost £1,955 next year. It’s another rise that doesn’t sound too terrifying in its own right, but really adds up. It’s up by more than a quarter over the past decade (26%).
6. Rising house prices mean you’ll pay more stamp duty
Now the stamp duty holiday is over, homebuyers face large tax bills again – and those bills are rising. The last time there was a significant permanent change to stamp duty and its thresholds (aside from first time buyers and property investors) was back in December 2014 when the average house cost £191,669. In the interim, the average has risen to £274,712 – almost 45% – dragging huge numbers of people into paying higher rates of tax.
7. Capital Gains Tax for property investors
For property investors, rising house prices also raise the question of Capital Gains Tax (CGT). House prices are currently up 10.8% in a year, which is going to mean higher CGT bills for second property investors who sell up. At the same time, the capital gains tax threshold has been frozen, so if you realise more than £12,300 in capital gains in a single year, you will pay tax. By 2025/26 this will cost us an extra £30 million a year.
8. Inheritance tax (IHT)
The IHT nil rate band will remain at £325,000 and the residence nil rate band at £175,000 in the next tax year. Meanwhile, the IHT annual tax gift allowance is spending its 4th decade at £3,000. Given how house prices are rising, it means more estates will have more inheritance tax to pay. By 2025/26 the OBR says the freeze in the inheritance tax threshold will cost us an extra £445 million a year.